Oil Is Back Above US$90 As Strait of Hormuz Risks Mount

Oil Is Back Above US$90

Brent crude rose above US$90 on Monday and extended its gains on Tuesday, closing at US$91.02 on 18 August. WTI remained lower at US$84.94, reflecting the geographic concentration of the current supply risk. Brent is the more relevant international benchmark in this context, given its greater sensitivity to seaborne crude flows from the Middle East.

The catalyst was a deterioration in diplomatic expectations. The 60-day period associated with the June interim agreement expired without a broader resolution, while Washington and Tehran remain divided over the conditions required to restore normal shipping through the Strait. Iran has said the Strait will remain closed until the US meets conditions including the lifting of sanctions and military pressure, while Washington has indicated that no talks are currently scheduled.

Oil had already absorbed a significant geopolitical risk premium during the six months since the conflict began. What has changed is the market's assessment of how long that risk is likely to remain embedded in crude prices.

An immediate physical shortage is not required for oil prices to rise. As the perceived probability of a rapid restoration of supply falls, the value of available barrels increases and the geopolitical premium widens.

The move above US$90 is therefore less about a shift in underlying demand and more about markets repricing the probability and duration of supply normalisation.

What Moved the Price

Iran signalled on Monday that it would adopt a more aggressive military posture if talks with the US continued to fail, while President Trump renewed his threat against Oman, a longstanding mediator in the conflict, and called on Tehran to accept defeat. The development matters because Oman remains one of the few channels of indirect communication between Washington and Tehran. A threat to that channel does not need to materialise to move markets. It only needs to reduce the perceived probability of a diplomatic resolution. With around a fifth to a quarter of global seaborne oil normally passing through the Strait, even a modest deterioration in reopening prospects can support a higher geopolitical premium in crude. Market commentary on Tuesday increasingly characterised the move as a shift from pricing a temporary disruption towards a more prolonged closure.

The disruption itself is substantial, although its precise scale remains contested. Reported flows through the Strait have fallen from around 18 million barrels a day to approximately 2 million barrels a day, while total Middle East oil exports are less than half their pre-war levels. Vessel traffic remains extremely limited, although the use of tankers operating without active transponders makes precise flow estimates difficult. Even taking the more optimistic official figures at face value, the shortfall from pre-war Middle East supply still runs to roughly 5 million barrels a day, which gives a useful floor on the disruption regardless of which side's flow estimates prove closer to correct.

Supply has not been left entirely without alternatives. Saudi Arabia has resumed some crude loadings and is using ship-to-ship transfers outside the Gulf to maintain access to Asian buyers. China has also adjusted its purchasing behaviour, initially reducing imports and drawing on inventories as the disruption intensified.

More recently, however, China's behaviour has shifted. Imports rose to 8.41 million barrels a day in July, up from June's decade-low of 7.12 million, though still more than 3 million barrels a day below pre-war levels. With refinery processing running only marginally above June's level, China actually added a small volume to inventories in July rather than continuing to draw them down, a reversal from the drawdowns of roughly 500,000 barrels a day in May and 940,000 in June. China has managed this largely by cutting exports of refined fuel products rather than by reducing domestic supply, keeping processing at levels still sufficient to meet local demand. That suggests Beijing's inventory policy could become an increasingly important swing factor for global oil demand if imports continue to recover while supply through Hormuz remains constrained.

The Market Is Repricing the Duration of the Disruption

The key change is not the existence of Hormuz risk, since that has been present for months. It is the increasing probability that the disruption persists for longer than markets had been assuming.

The expiry of the negotiation window without a deal has shifted expectations around how quickly normal shipping can resume, while extremely low vessel traffic is providing evidence that the disruption is moving beyond a purely geopolitical headline.

A short disruption creates a temporary risk premium that can unwind once conditions normalise. A prolonged disruption begins to affect inventories, alternative export capacity, freight rates and physical supply. Producers must redirect cargoes, buyers secure alternative barrels and refiners adjust procurement, all while shipping and insurance costs rise.

Saudi Arabia's recent workarounds demonstrate that producers can adapt, but they do not represent a return to normal trade. Saudi Aramco has resumed some loadings inside the Strait while also offering cargoes to Asian refiners through ship-to-ship transfers.

That leaves physical flows as the most important indicator beneath the headline price.

If inventories begin to fall materially while prompt crude becomes increasingly expensive relative to longer-dated contracts, the market would have stronger evidence that a geopolitical risk premium is becoming a genuine physical supply constraint.

The question for markets is therefore straightforward: when does a geopolitical risk premium become a supply shock?

Could Oil Reach US$100?

US$100 oil is once again within the range of plausible outcomes, but it should not be treated as a base-case forecast. The path to that level would likely require the current disruption to persist, with limited improvement in shipping flows and no meaningful diplomatic breakthrough. Further attacks on vessels or energy infrastructure would raise the risk premium, particularly if they undermine confidence in alternative routes.

A move towards US$100 would also depend on the ability of producers to offset lost volumes. OPEC+ spare capacity provides an important buffer, while non-OPEC producers can respond to higher prices over time. Those adjustments, however, are not immediate.

In the short term, prices can move faster than physical supply. Buyers compete for available barrels before producers and consumers have had time to respond, creating the potential for significant price volatility.

The opposite scenario remains equally important. If diplomatic progress resumes and shipping through Hormuz recovers, the geopolitical premium could unwind quickly. Oil has already demonstrated two-way volatility during the conflict, with sharp increases during periods of escalation followed by retracements as conditions stabilised. The current move is therefore better understood as a repricing of risk than a direct path towards US$100.

There is also a broader geopolitical layer. Continued disruption in the Gulf alongside supply risks linked to the war in Ukraine would compound uncertainty and increase the potential for another period of elevated energy prices and volatility. For now, US$100 is best viewed as a threshold that becomes increasingly relevant if markets lose confidence in a timely restoration of normal flows.

The Inflation Problem Is Back

Higher oil prices are awkward for central banks because they tend to push measured inflation up and economic activity down at the same time, leaving little room to address both with the same policy lever.

The mechanics are well understood. Higher crude flows directly into petrol and diesel prices, and from there into freight and transport costs across the economy. Airlines pay more for jet fuel, manufacturers pay more to move materials, and retailers pay more to stock shelves. Where competitive conditions allow it, some of that cost eventually reaches consumers.

The RBA has been managing this dynamic for months. Its May Statement on Monetary Policy forecast headline inflation peaking at 4.8% in the June quarter of 2026, with underlying (trimmed mean) inflation expected to stay above 3% until mid-2027. Both forecasts were built around the assumption that higher fuel and raw material costs from the conflict would pass through to consumer prices faster than usual, given existing capacity pressures in the domestic economy. By its August Statement, the Bank assessed that headline inflation had peaked as forecast in the June quarter and was on track to return to the 2 to 3% target range by early 2027, while flagging that underlying inflation would likely stay above 2.5% until early 2028 and that elevated short term inflation expectations still carried a risk of renewed cost pressure if fuel prices rose again, which is the scenario now unfolding.

A sustained further rise in oil, on top of that starting point, would complicate the RBA's task rather than simplify it.

The bond market has already registered a version of this concern beyond Australia. The US 30 year Treasury yield touched 5.337% intraday on 18 August, its highest level since 2007, as investors weighed stalled US-Iran talks against oil above USD90 alongside separate concerns over the scale of US government bond issuance. Equity markets moved in sympathy: the Nasdaq fell 1.33% and the S&P 500 declined 0.69% on the day, a reminder that an energy driven inflation scare does not stay contained to energy stocks.

What It Means for the ASX



The ASX carries a natural, if imperfect, hedge against higher oil prices through the size of its energy sector, though the effect is far from uniform across the market.

Energy producers such as Woodside Energy and Santos are the more obvious potential beneficiaries, given their direct exposure to crude and LNG realisations. Assuming production volumes and costs hold broadly steady, higher benchmark prices can flow relatively directly into cash flow. The picture is more layered for LNG specifically, where pricing under some contracts is linked to oil benchmarks and under others to regional gas prices, meaning the earnings impact for any individual producer depends on its own contract mix rather than the oil price alone.

On the other side sit the fuel intensive parts of the market. Airlines are the clearest example, given how large a share of their cost base is jet fuel. Transport, logistics and retail businesses face a related but more indirect squeeze, mediated by fuel surcharges, freight contracts and how much of the cost increase competitive conditions allow them to pass on. The same oil shock that lifts an energy producer's cash flow is, at the same time, a margin headwind for an airline or logistics operator elsewhere in the same index.

The Australian dollar adds a further layer. Because oil is priced globally in USD, the AUD/USD rate determines how directly a move in Brent is felt domestically. A weaker Australian dollar amplifies the local currency impact of a given USD oil price rise, while a stronger currency cushions it. Hedging practices also vary from company to company, which is a further reason this remains a sector level dynamic rather than a uniform read through to any specific stock.

What Comes Next

The next phase of the oil market will be driven by shipping, diplomacy and duration.

Shipping is the key near-term signal: a sustained recovery in Hormuz traffic would indicate easing risk and a fading supply shock. Diplomacy remains uncertain, with US–Iran talks stalled and Oman’s mediation role critical to any restart in negotiations.

Duration ties both together. Brief disruption would likely see prices unwind; prolonged disruption would force the market to price tighter supply, higher freight and lower inventories. Saudi Arabia’s partial workarounds show adaptation, but not normalisation.

Brent above US$90 matters less than what is happening in physical flows, inventories and freight markets. For investors, the focus should be vessel traffic, product prices, freight rates and prompt–forward spreads. For Australia, higher oil supports resources but pressures transport, airlines and consumers, while complicating the RBA’s inflation outlook if it persists.

US$90 is not the key level. Duration is.

If disruption persists, US$100 oil becomes plausible. If shipping normalises, the premium fades quickly.

For now, markets are pricing one thing: how long the disruption lasts.